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An alternative to Bankruptcy is an Individual Voluntary Arrangement (IVA) which is a legally binding agreement between a debtor and his/her creditors whereby the debtor repays all or part of their debt over a fixed period of time.

A debtor may make either a one off or regular payments for the benefit of their creditors. An IVA based upon regular contributions may last for up to five years.

If a debtor runs a business they can continue to trade in an IVA.

Failure to comply with the terms of an IVA may result in a debtor being made bankrupt.

Individuals who do not trade as sole traders are also able to propose an IVA. They will be required to provide proof of their income and expenditure.

A VA is administrated by a Licensed Insolvency Practitioner who will act in the capacity of Nominee, pending the approval of the Arrangement, and then as Supervisor once the Arrangement comes into effect. The Nominee will assist the individual in preparing a proposal to be presented to the creditors for consideration. Apart from being unable to change the rights of secured or preferential creditors without their consent a proposal for a VA may take any form.

The Nominee will usually contact the major creditors before sending out the proposal to obtain their views as to whether they would be likely to support the proposed VA.

The Nominee will send a copy of the proposal to all creditors along with notice of a meeting of creditors which they will be able to approve, reject or modify the proposal.

A proposal must be approved by 75% in value of creditors present or voting by proxy at the meeting of creditors.

The Supervisor’s role is to monitor the VA to ensure that the individual complies with their obligations under the terms of the VA and to distribute funds to creditors. The individual will remain in control of their business during the period of the VA but will be required to provide the Supervisor with regular accounting information.

Once a VA is approved by unsecured creditors it binds all such creditors whether or not they voted or attended the creditors meeting. Creditors who did not receive notice of the meeting are also bound by the Arrangement, although they do have a short period of time they become aware of the meeting to apply to the Court for the approval of the Arrangement to be reserved. Such an application is only likely to succeed if the creditor can prove that they were unfairly prejudiced. This means that once a VA has been approved creditors will be unable to take any alternative action to recover their debt in full.

If the individual fails to comply with the terms of the Arrangement the Supervisor may, under the terms of the Arrangement, be empowered to present a petition for the company or partnership to be wound up or the partners or individual to be made bankrupt.

Bankruptcy

A Bankruptcy Order is made by the Court either on the application of a creditor who is owed over £750 or a debtor personally.

The process of requesting the Court to make someone bankrupt is referred to as petitioning the Court for a Bankruptcy Order.

A debtor who wishes to petition the Court to make themselves bankrupt must pay fees of up to £705 (as at Feb 2013). This figure comprises a Court fee of £180 and a fee of £525 to contribute towards the costs of administering the bankruptcy. The Court fee may be waived in certain circumstances for example if the debtor receives certain benefits.

Once the Court has made an Order that a debtor shall be made bankrupt his/her assets come under the control of the Official Receiver who is automatically appointed as Trustee in Bankruptcy.

If the bankrupt has assets the Official Receiver may call a meeting of creditors to appoint a Trustee in Bankruptcy, who must be a Licensed Insolvency Practitioner, in his place or the Secretary of State may appoint a Trustee. The Trustee is responsible for realising the bankrupt’s assets, settling the costs of the bankruptcy including the costs of the Official Receiver and if possible distributing funds to creditors.

Bankruptcy generally lasts for one year before an individual is discharged but the individual may be required to make contributions from their income for the benefit of their creditors for up to 3 years. If the bankrupt has acted dishonestly or is blameworthy in some way the Official Receiver may apply for a Bankruptcy Restriction Order (BRO) for between 2 and 15 years. The restrictions are the same as those applying to bankruptcy.

Bankruptcy will affect an individual’s ability to obtain credit even after they have been discharged as credit reference agencies keep a record of bankruptcy for six years.

Bankruptcy usually involves the closure of any business that the bankrupt runs and the dismissal of their employees.

It can affect employment. Members of certain professionals including solicitors and people whose roles are regulated by the Financial Conduct Authority are not allowed to become bankrupt.

If a bankrupt owns a house either solely or jointly with a partner their share or interest in the property must be realised for the benefit of creditors. In many cases a forced sale of the property, which can be expensive and time consuming may be avoided if a spouse or other relative or friend can purchase the bankrupt’s interest.